Markets enjoyed an outright risk-on session as US citizens are heading to vote for a new president and part of Congress. Last week, market uncertainty on the potential impact of the second corona wave and on the outcome of the US presidential election were enough a reason for investors to take a more cautious approach, reducing exposure to risky assets. However, since yesterday investors again saw the glass half full rather than half empty. Corona infections in Europe and in the US continue to rise and governments are stepping up lockdown measures weighing on economic activity. However, the virus theme this week moved (at least temporarily) to the background as a driver for trading. At the same time, investors apparently grow ever more confident of a democratic sweep resulting in a majority of Biden’s party in both the House of Representatives and the Senate. This scenario is seen as providing best chances for a big additional stimulus package, supporting the cyclical sectors of the economy that lagged in the recovery from the corona pandemic. This broad macro assessment on the outcome of what still remains a binary (political) event risk, today was enough to sustain a broad-based equity rally from Asia, over Europe into the US. Major European equity indices are gaining up to 2.0%. The Dow (1.5%) and the S&P (1.3) again outperform the Nasdaq (1.0%). Contrary to what was the case yesterday, the global risk-on trade this time was also visible in US bond markets. The US yield curve bear steepens with yields rising between 0.8 bp (2-y) and 4bp (30-y). Yields rises in Europe again remain modest/limited with German yields rising about 1bp, the 30-y even slightly outperforming (+0.5bp). The ECB’s ‘promise’ a recalibration of its policy support continues tempering spill-over effects from higher US yields. The combination of a global risk-on and a limited rise in core yields supported the bid for EMU peripheral bonds. 10-y spreads versus Germany narrowed across the board with Greece (-6 bp) and Italy (-4bp) outperforming.
Recently, the dollar profited modestly from lingering uncertainty. The trade-weighted USD (DXY) and EUR/USD came within reach of important resistance/support, but a real test/break didn’t occur. Today, USD bulls threw in the towel. EUR/USD rebounded north of 1.17. The TW dollar dropped from 94+ levels to currently trade in the 93.60 area. USD/JPY (104.65) again shows no clear trend. The risk-rally also triggered a nice comeback in CE currencies (forint, Czech korona and zloty) which suffered both from the regional rise in corona indications and the risk-off. A better sentiment and a further rise in the oil price (Brent back above $ 40 p/b) also supported the likes of the Canadian dollar (USD/CAD 1.3150 area) and the Norwegian krone (retesting the 11 big figure). The Turkish lira still fails to profit from the risk rally. Ongoing high October inflation and the CBTR mainly taking only ‘technical’ measures to reduce lira liquidity, pushed the lira to new all-time lows against the dollar and the euro. EUR/TRY is nearing the barrier of 10! Sterling profited slightly from the global risk rebound. However pending Brexit negotiations and the upcoming BoE meeting cap the upside for the UK currency. EUR/GBP hovers in the 0.90 area.
The Italian government is about to announce a wave of new company shutdowns to fight the coronavirus, La Repubblica reported. Italy would go for a regional three-tiered approach, wanting to avoid a national shutdown that send an unprecedented economic shockwave in the 2nd quarter. Five regions could fall into the “red” category. The government is simultaneously preparing a relief fund of at least 1.5bn euros to compensate for forced closures..
Riksbank governor Ingves said the current forecasts do not take into account the second coronavirus wave that is sweeping across Europe, suggesting that the Q4 growth forecasts are prone for a revision when they meet end of November. Ingves said the repo rate thus should stay at zero for the foreseeable future, adding that the central bank is ready to expand its balance sheet further. The governor expressed satisfaction with the Swedish krone’s relative stability during the latest volatile weeks. EUR/SEK is trading slightly higher today near 10.38.